Question

The following graph shows the market for Oregon salmon. Suppose the state of Oregon limits the salmon harvest to 400 million pounds per year in Oregon waters in order to prevent over-fishing. The state issues 2,000 fishing licenses that allow each license holder to harvest 200,000 pounds of salmon per year PRICE (Dollars per pound) 20 Quota 18 16 14 12 10 Demand 1000 200 400 600 800 QUANTITY (Millions of pounds per yearl Use the graph to fill in the following table Quantity Demand Price Supply Price Quota Rent (Millions of (Dollars per (Dollars per (Dollars per pounds) pound) pound) pound) Without quota With quota Recall that each of the 2,000 licenses allows the holder to harvest 200,000 pounds of salmon per year from Oregon waters. Assuming licenses can be freely exchanged, the market value of one Oregon salmon fishing license is The license system results in quota rents for Oregon salmon fishermen who manage to receive licenses. However, the pounds worth of mutually beneficial salmon transactions each year. The lost quota also prevents transactions resulting from the quota lead to a deadweight loss of per year. (Hint: To calculate the deadweight loss, recall that the area of a triangle is equal to 1/2 Base x Height.)

Answer 1

When there is no quota, the market quantity is 500 million, demand price is $10 and supply price is also equal to $10 per pound. Quota rent is the difference between demand price and supply price. Hence, there is no quota rent

With the quota, the market quantity is 400 million, demand price is $12 and supply price is $8 per pound. Quota rent is the difference between demand price and supply price. Hence quota rent is 12 - 8 = $4 per bushel

Since license holders are getting a price of $12 but have a cost of $8, they can pay at most $4 per license. Hence market price of license is $4.

Quota prevents 100 million pounds. The DWL is 0.5*(12 - 8)*(500 - 400) = 200 million